BAE – VT merger

The UK shipbuilders BAE Systems and VT Group confirmed the long-awaited merger of their shipbuilding assets following the Government?s decision to provide the Royal Navy with two new aircraft carriers.

The £1 billion company will effectively become the UK?s last shipbuilder and the joint venture will own dockyards at Portsmouth and on the Clyde at Govan and Scotstoun. The sensitive, military nature of the products being built means the joint venture is effectively a three-way partnership between the MoD, BAE and VT, formerly Vosper Thorneycroft.

The MoD will guarantee the joint venture, dubbed jvco, shipbuilding and repair work for 15 years, including the two aircraft carriers. In return, jvco will share cost savings from the merger with the government. It will also be able to guarantee work for the 4,500 people directly employed by the dockyards and tens of thousands more workers at supplier companies.

VT will own 4% of jvco while BAE will own the remainder. An independent chairman will be announced soon but it is expected to be Sir John Parker, chairman of National Grid Transco and a former shipbuilder himself. VT will be able to sell its stake in jvco in three years for a minimum of £380 million and the company is expected to take this option in order to concentrate on its growing support services business.

Lord Drayson, the defence procurement minister, wanted to move away from a culture where military equipment was delivered late and then not repaired when it broke down. The new system promotes a closer partnership between customer and supplier, with the MoD willing to pay more upfront to guarantee higher service levels throughout the equipment?s life. The National Audit Office has found that this “through life” concept has already saved the MoD more than £1 billion on just two aircraft contracts. It is also popular with industry as it guarantees long-term income beyond the initial supply of the equipment.

In addition, VT will pay £75 million to buy BAE out of another joint venture the two companies run called Flagship, which provides training and support to the Royal Navy. Last year BAE?s shipbuilding division has sales of £501 million and VT?s £254 million.